Key Takeaways

  • A Texas LLC operating agreement defines ownership, management, and operational rules, reducing the risk of future disputes.
  • Texas allows both member-managed and manager-managed LLCs, but the choice must be stated in the Certificate of Formation.
  • A manager-managed structure is best when investors or family members want to contribute capital without participating in daily operations.
  • Operating agreements should address voting rights, manager authority, profit distribution, admission/withdrawal of members, and dispute resolution.
  • While not required by Texas law, having a written operating agreement protects the LLC’s liability shield and ensures clarity among members.

A manager-managed LLC Operating Agreement Texas refers to a document that details the operational structure and processes of a manager-managed limited liability company (LLC) in Texas. While an Operating Agreement is not a requirement for forming an LLC, it is an important document that can help you run your LLC smoothly and avoid errors and misunderstandings in the future. Since a manager-managed LLC and a member-managed LLC operate differently, their Operating Agreements differ in a number of ways.

Understanding the Management Structure of an LLC

In most states, an LLC is member-managed by default, but Texas and some other states require an LLC's owners, also known as members, to state in the Certificate of Formation whether their company will be member-managed or manager-managed.

When an LLC is member-managed, all its members will participate in the management of the company. In a manager-managed LLC, the members will surrender all management responsibilities to one or more managers. The manager elected to manage an LLC can be someone else other than a member. The managers in a manager-managed LLC are similar to the directors of a corporation.

Importance of a Texas LLC Operating Agreement

Even though Texas does not legally require LLCs to adopt an operating agreement, having one is highly recommended. Without a written agreement, the LLC defaults to Texas statutes, which may not reflect the members’ intentions. An operating agreement ensures clarity on voting rights, manager responsibilities, and profit distribution, reducing the chance of disputes. It also strengthens the LLC’s limited liability protection by showing courts that the business is separate from its owners.

Main Reason to Opt for a Manager-Managed LLC

If an LLC has silent investors or investors who will not be part of the daily operations of the company, it should be manager-managed. If you want to form an LLC but need five family members to contribute money to set it up, you can list your family members and yourself as members and be the only manager. This way, your family members will not get in your way as you run your LLC.

The members of an LLC are the ones who will elect the manager, so they can replace the manager anytime they want. However, as stated in the Operating Agreement, the members have to vote to replace a manager, formalize the replacement in writing, and sign the document, which adds a layer of formalities to the process.

If your LLC is member-managed and you and your family members are all members, it is highly likely that disputes will arise. For instance, you and your family members have an argument during a Thanksgiving dinner, and suddenly two members decide to close the bank account. They can easily do so if your LLC is member-managed. However, if your LLC is manager-managed, they need to go through the manager, replace you as the manager, or vote for someone else to become the manager in order to make the change.

Legal Protections and Risk Reduction

A Texas LLC operating agreement does more than assign management duties. It also helps shield members from personal liability. If the LLC is ever sued, courts look to see if the business has been operated as a distinct entity. Having a detailed operating agreement demonstrates formal governance and can protect members’ personal assets. Additionally, by specifying procedures for replacing managers, distributing profits, and handling disputes, the agreement helps avoid conflicts that could harm the company.

Difference With the Operating Agreement of a Manager-Managed LLC

Usually, the main difference between the Operating Agreement of a manager-managed LLC and that of a member-managed LLC is the added complexity of preventing members from getting involved in the manager's operational duties. Also, the members will need strict guidelines for assigning membership percentages, breaking up the LLC, and buying members out. When creating an Operating Agreement for a manager-managed LLC, you should give the authority to run the company only to a manager.

Writing an Operating Agreement for an LLC

Generally, a manager-managed LLC contains the following sections and information:

Step 1 – Name of LLC

  • Name of the LLC at the top of the document

Step 2 – The Agreement

  • Effective date of the Operating Agreement
  • Full name and business address of each member of the LLC

Step 3 – LLC's Name and Principal Place of Business

  • Name under which the LLC has been registered
  • Full address of the LLC
  • City where the business is located
  • Date on which the LLC was formed
  • Purpose of the LLC
  • Term of the LLC
  • Name and contribution amount of each member of the LLC
  • Each member's name and percentage interests
  • Proceed

Step 4 – Books, Records, and Tax Returns

  • Bank accounts
  • Management of the LLC
  • Appropriate limits agreed upon by the LLC's members

Step 5 - Titled Sections

  • Date for annual meeting of members
  • Ownership of company property
  • Assignment of interests
  • Right of first refusal
  • Withdrawal events
  • Admission of new members
  • Dissolution and liquidation
  • Representations of members
  • Name of the LLC and its effective date
  • Notices
  • Amendments
  • Arbitration
  • Indemnification
  • Miscellaneous

Step 6 – Signatures

  • Execution date of the Operating Agreement
  • Signature of the LLC's representative
  • Signature of each member

Key Clauses Every Texas LLC Operating Agreement Should Include

When drafting a Texas LLC operating agreement, certain clauses are particularly important:

  • Membership Contributions and Interests: Outline each member’s capital contributions and ownership percentage.
  • Voting Rights: Specify how votes are weighted—by percentage interest or equally among members.
  • Manager Authority: Define the scope of the manager’s decision-making power and limits on that authority.
  • Profit and Loss Allocation: State how profits will be divided among members.
  • Buyout and Transfer Restrictions: Clarify whether members can sell or transfer their interests, and whether others have a right of first refusal.
  • Withdrawal or Death of Members: Provide procedures for handling voluntary withdrawals, incapacity, or death.
  • Dispute Resolution: Include mediation or arbitration clauses to avoid costly litigation.

Texas-Specific Considerations

While the general structure of an LLC operating agreement is consistent across states, Texas law has unique features to consider. For example, Texas requires the management style (member-managed or manager-managed) to be listed in the Certificate of Formation. The agreement should also align with Texas’s Business Organizations Code, which allows broad flexibility but defaults to state rules if the agreement is silent on an issue. Finally, Texas courts place weight on written agreements when determining disputes, making it especially important for business owners to document their arrangements thoroughly.

Frequently Asked Questions

1. Is a Texas LLC operating agreement required by law?

No, Texas does not require an LLC to have an operating agreement, but having one is strongly recommended to protect the company and its members.

2. What happens if we don’t have an operating agreement?

Without an agreement, Texas law governs by default, which may not reflect the preferences of the members. This can create conflicts and weaken liability protection.

3. Can a non-member be the manager of a Texas LLC?

Yes. In a manager-managed LLC, the manager can be a non-member, similar to a corporate director, as long as the operating agreement allows it.

4. What clauses should I include in a Texas LLC operating agreement?

Essential clauses cover contributions, voting rights, manager authority, profit allocation, buyout rules, and dispute resolution.

5. Can an operating agreement be changed later?

Yes. Members may amend the agreement, but Texas requires formal approval and written documentation according to the process outlined in the agreement.

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